Correlation Between Merck and Eastman Chemical

Can any of the company-specific risk be diversified away by investing in both Merck and Eastman Chemical at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Merck and Eastman Chemical into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Merck Company and Eastman Chemical, you can compare the effects of market volatilities on Merck and Eastman Chemical and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Merck with a short position of Eastman Chemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Eastman Chemical.

Diversification Opportunities for Merck and Eastman Chemical

0.53

Correlation Coefficient

Merck  Eastman Chemical

Very weak diversification

The 3 months correlation between Merck and Eastman is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Eastman Chemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eastman Chemical and Merck is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Merck Company are associated (or correlated) with Eastman Chemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eastman Chemical has no effect on the direction of Merck i.e., Merck and Eastman Chemical go up and down completely randomly.

Pair Corralation between Merck and Eastman Chemical

Considering the 90-day investment horizon Merck Company is expected to under-perform the Eastman Chemical. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.1 times less risky than Eastman Chemical. The stock trades about -0.18 of its potential returns per unit of risk. The Eastman Chemical is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  10,229  in Eastman Chemical on September 13, 2024 and sell it today you would lose (296.00) from holding Eastman Chemical or give up 2.89% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Merck Company  vs.  Eastman Chemical

Merck Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite abnormal performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Eastman Chemical

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Eastman Chemical has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy primary indicators, Eastman Chemical is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Merck and Eastman Chemical

The main advantage of trading using opposite Merck and Eastman Chemical positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Eastman Chemical can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Eastman Chemical will offset losses from the drop in Eastman Chemical's long position.

The idea behind Merck Company and Eastman Chemical pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..